I am Chairman and CIO of Gramercy Capital Mgt. Corp., a NY registered investment advisor, which I founded in 1986. Gramercy has been ranked #1 in the Nelson's Directory of Registered Investment Advisors. I hold a B.A. in history from the University of Wisconsin, Madison and was awarded a Ford Foundation Fellowship. I earned an M.B.A. in financial accounting from the NYU Graduate School of Business and am also a CFA (Chartered Financial Analyst). I spent 15 years as a media and leisure analyst before I began managing OPM (other people's money) in 1980 at Manufacturers Hanover Trust where I oversaw their $250 million "mid-cap" fund. I have been the subject of feature stories in many publications such as The Wall Street Journal Business Week, Newsweek , and USA Today. I have appeared often as a guest on financial programs on CNBC, Bloomberg, PBS and Fox Business. I have been contributing to Forbes.com since 2006 so you can see my track record of commentary.

Groupon Caught In The Mother Of All Short Squeezes

How fitting for the day after Mother’s Day that Groupon’s short sellers should all try to cover on the same historic day.Want to know what a major short squeeze looks like. Here it is in real living color and is what happens when a reported half of the shares in the public float are shorted. The covering frenzy is only picking up steam now.

Whether being a single digit stock was the right price last week, then down by more than half from the original $20 offering price, is not clear yet. What is certain is that Groupon has a major problem looming right up ahead. After being forced to restate its earnings from 2011, Groupon postponed its release from lockup of all those shares insiders are holding. Normally, the lockup period last 180 days but after the restatement the lockup will now expire on June 1. Remember that 95% of the shares have been unable to trade. Whether those shares will come out in a torrent or a trickle in a couple of weeks remains to be seen. But before you load up, think twice about the fact that only 5% of the shares trade now in public markets. The other 95% will soon be available.

Amazingly, the hoopla was caused over a penny of profits. Who even bends over to pick up a penny off the street if you see one these days? Consider that the Treasury from time to time talks of discontinuing the useless penny but then how could merchants make offers at $99.99 on which to offer Groupons?

If you look carefully at the earnings press release you would observe that the company loves to embellish its earnings and its revenues. It always has and it appears it always will. The SEC rejected its reporting of “gross billings” as some useful metric for investors but the company can’t help itself when it comes to showing that number anyway in its public releases. It also loves right now to talk about its present numbers in comparison with those of a year ago. It’s much more revealing is to look at the numbers vs. a quarter ago but why call attention to those when they aren’t that great? Those show only roughly 10% revenue growth, not the doubling against year ago numbers that the company is touting now. Using the very “gross billings” numbers: $1.354 billion in 1Q 2012 vs. $1.230 billion in 4Q2011, for a measly gain of only $123.9 million despite all sorts of added personnel to flog the merchants for more business. There are also some odd reclassifications of expenses from marketing to other categories.

Revenues came in at $559.3 million in the latest quarter. However, do take note that the company is projecting June quarter revenues of $550 -590 million. That implies the possibility ofdown revenues in the current quarter, not exactly the stuff to support a 50% leap in the stock price in just a few hours of trading.

It is also quite amazing that this model doesn’t really scale. Most companies with half a billion in revenues do find a way to turn a profit. Not this one, yet. And, unlike other unloved industries like newspapers, from whom they are stealing advertising dollars, they don’t generate any cash either. Gannett, which I have just written about, just increased its dividend (now close to a 6% yield) and will also buy back some stock out of its prolific but ignored cash flow. It actually also has earnings. Maybe not what they used to be but real money you can take to the bank or pay your shareholders in dividends.

Groupon is generating little cash and is up to its same old balance sheet tricks that it employed at the time of its IPO. While it shows lots of cash on its Balance Sheet, it still owes its merchants $617 million vs $329 million at year’s end. And its other current liabilities which are not explained are now $450 million vs. $191 million at year end. The two items taken together total an increase in current liabilities of $547 million and now total $ 1.067 billion, almost all the cash on hand.

In summary, learn what can happen when a crowded trade is forced to unwind or when the music stops abruptly. And remember there are only days left until the June 1st expiration of the lockup before you fall headlong in love with this stock. It’s not clear what all of this means for Facebook coming public this week. They seem to be vastly different companies. Facebook actually makes money. So far that is eluding Groupon unless they use all sorts of accounting gimmicks to get there.

Mrs. Lappin, Gramercy Capital and its clients own shares in Gannett at this time.

In these turbulent times, put our decades of experience to work for your portfolio. If you are seeking help with your portfolio, contact us at info@gramercycapital.com. Follow Joan on Twitter@joanlappin. Meet her at The Money Show where she will be speaking twice on May 15, 2012.

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